Perversion against the free market!
The cost of capital manipulated until exhaustion, promotes the financing of non-viable investment projects and investment in speculative markets in search of simple profitability.
"It's easy to be visibly 'compassionate' if others are forced to pay the cost." Murray Rothbard
Super Thursday! This is what I would call the last appearance of Mario Draghi in command of the ECB. After a complex week for Spanish banks on the stock market, which weathered the storm caused by the comments of the CJEU lawyer against the IRPH, with notable increases in the market and against all odds, the typical phrase of “sells with the rumor and buy with the news ”it gained strength again.
However, no matter how much the market was determined not to give up, technical support had to undertake a new issue, that of the ECB! The last two meetings of the ECB served as a cancellation of the attempt to change the trend that equities in Europe have tried to carry out over the past year. Far from meeting expectations regarding the asset purchase program, with a total amount of 20,000 million euros per month in public debt indefinitely (an asset purchase program of between 30,000 and 45,000 million euros was expected to purchase rental assets variable and debt, within a period of 12 to 18 months), the eyes were on their penalties for banking. The sentence was final and the penalties on the ease of deposit went from -0.40% to -0.50%.
Why is the bullish orgy of the banking sector last Friday? Some analysts blame it on the oversold under that rumble that destroys my eardrums so typical to try to explain the inexplicable.
Beyond the simplicity of the fact, the reality is very different. Let me explain to you that once again, the general ignorance about monetary policies allows a new robbery both of private property, as well as human values as necessary as effort and sacrifice. Our central bank opens the ban and invites us to think that it is better to borrow than to save, to speculate than to invest and waste than to consume. So we are going gentlemen!
In summary, I can affirm that the ECB took the following measures: Buy public debt assets at a rate of 20,000 million euros per month indefinitely, increase the penalty in the ease of deposit to -0.50%, leave interest rates to 0% and link its evolution to the fulfillment of the inflation objective at 2% and start of a new TLTRO program. But what did the market like so much?
Contrary to what the first reading tells me, the positive connotation does not start as much by the asset purchase program, but in that small print that the statement includes. The penalty on the ease of deposit at -0.50% is applied by levels, which implies de facto the reduction of the penalties for the reserves in the deposits that the private banking maintains in the ECB. This clause tells me that the ECB will not charge the penalty on the legally required reserves to the bank, multiplied by 6. This exemption causes the Bank to go from having a cost in penalties of € 9,000MM at a cost close to € 5,000MM, which indirectly implies that the banking sector in Europe earns de facto € 4,000M in annual net profit.
This leads me to wonder: Are they kidding us? That is, what is the point of increasing the penalty to -0.50% if the reality is that the penalties are reduced by 40%? Well, the answer to this question is in the TLTRO. TLTROs are a financing program specific to commercial banks to promote the loan. If a series of requirements are met, the ECB lends 30% of the loan granted by the commercial bank, under particularly advantageous conditions. Specifically, the interest rate charged by the ECB to commercial banks through the TLTRO program is the basic 0% refinancing rate, or the deposit facility at -0.50%. In other words, the ECB subsidizes the lending activity to commercial banks, paying up to -0.50% of the amount requested by the commercial bank to the ECB.
Private banks buy public and private debt from large companies and resell it to the ECB in exchange for reserves
With all this, the circuit although somewhat complex is understandable and perverse. Private banks buy public and private debt from large companies in the financial markets, resell it to the ECB in exchange for reserves. These reserves can be used to continue buying debt or circulating in the interbank. If public debt is bought in the markets, there is no penalty. If it is kept as a deposit in the ECB there is a penalty. TLTROs are a grant to grant loans. Commercial banks cannot lend the deposits deposited with the ECB, but they can do so in what is supposed to be their main activity. In other words, our beloved bank can maintain in the ECB 6 times its level of reserves required by the norm without penalty. But you must reuse your debit balance by buying debt, which at current levels obviously has negative returns. The level of reserves that exceeds the asset purchase program is penalized for private banking, so is obliged to lend not to pay, with an additional subsidy of 0.50% on 30% of the loans granted to the financing activity.
I understand this circuit as something really perverse, since what it is causing is the destruction of the basic principles of capitalism. The cost of capital manipulated until exhaustion, promotes the financing of non-viable investment projects and investment in speculative markets in search of simple profitability. The risk-free return, such as public debt or private companies of high credit quality, becomes negative, which degenerates in that any return is viable with this cost of capital. The capitalist system is leveraging on unviable investment projects and on speculative markets! something extremely dangerous and irresponsible, look where you look.
The central banks will be the cause of a great robbery to the welfare state
Many will criticize the free market for their ignorance and make them believe that private banks and markets are "the evil that has sunk the economy." But don't be fooled! The free market is precisely the one that encourages saving and striving. The free market is one that forces to close unprofitable investment projects, thus promoting innovation, which is transformed into service and consumer products that create prosperity for different economic agents. Manipulating the cost of capital and redirecting investment to non-viable investment projects and to speculative markets creates bubbles and is interventionism at its best. Do not be fooled, central banks will be the cause of a great robbery to the welfare state. As Rothbard said; It is easy to be compassionate if others are forced to pay the cost, and the cost of ignorance is the highest of all vital costs, believe me. First of all, forget about saving, striving and living a life appropriate to your income level. That is no longer carried, right gentlemen leaders? Well, long live the waste! Of course, until it lasts …